Tax-advantaged investment accounts
You make tax-free contributions and are taxed on funds you withdraw. These are also called tax-deferred accounts.
401(k) accounts
401(k) accounts are retirement savings plans sponsored by an employer. With 401(k) accounts, you can contribute pre-tax dollars on a regular basis and, in many cases, your employer will match up to a certain percentage of your contributions. The annual contribution limit in 2024 is $23,000. If you’re 50 or older, you can contribute an additional $7,500 each year.
Taxes on 401(k) withdrawals are age dependent. Withdrawals made before age 59 1/2 may be subject to a penalty tax, while withdrawals made after age 59 ½ are taxed as normal income, which depends on your tax bracket. Read more about 401(k) withdrawal rules.
Traditional IRAs
In the 2024 tax year, you can contribute up to $7,000 into a traditional individual retirement account, or IRA. If you’re 50 or older, you can contribute an additional $1,000 per year. You can withdraw penalty-free after age 59 ½, and you must begin withdrawing at age 73. Withdrawals are taxed as ordinary income, which depends on your tax bracket.
If you withdraw from an IRA before 59 ½, you may pay an additional 10% tax. An exception allows paying some expenses — such as your first home, higher education costs and certain medical expenditures — through an IRA withdrawal without incurring the tax penalty.
403(b) accounts
If you work for a public school or a tax-exempt 501(c)(3) nonprofit organization, your employer might offer to match contributions into a 403(b) account instead of a 401(k) account.
Similar rules and limitations apply: Contributions are made with pre-tax dollars and withdrawals are taxed. The annual contribution limit in 2024 is $23,000, and you can contribute an additional $7,500 each year if you’re 50 or older. You’ll face an additional 10% tax for withdrawals before age 59 ½, and you must begin making withdrawals after age 73.
Tax-free investment accounts
Most tax-free investment accounts are funded with after-tax dollars. This means you’ll be taxed up front, rather than when you withdraw funds or earn returns.
Roth 401(k) accounts
Like their traditional 401(k) counterpart, Roth 401(k) accounts are employer retirement savings accounts and allow you to make after-tax contributions and withdraw funds tax-free. Roth 401(k) plan participants can now choose to have after-tax contributions directed to their employer accounts.
There is no income limit for participating in Roth 401(k) accounts. Contribution and withdrawal limits are the same as with a traditional 401(k) account. However, there are no RMD requirements with a Roth 401(k).
Roth IRAs
Unlike traditional IRAs, contributions into Roth IRAs are made with after-tax dollars and withdrawals are made tax-free.
The annual contribution limit is $7,000 for tax year 2024, plus an additional $1,000 you’re over age 50. However, there are income eligibility restrictions for contributing to a Roth IRA.5
You don’t have to wait until age 59 ½ to withdraw contributions (not earnings) from a Roth IRA. After the age of 59 ½ you can make unlimited withdrawals as long as the account has been open for at least 5 years. Additionally, there are no RMD requirements with a Roth IRA.
529 savings plan
With a 529 savings plan, you can invest after-tax income to pay for qualified education expenses without incurring a tax penalty upon withdrawal. Qualified college expenses include tuition, fees, books, and room and board. Up to $10,000 per year can also be withdrawn tax-free and applied to K-12 tuition.
HSAs
Similarly, with a health savings account (HSA), you contribute pre-tax money and take it out tax-free to cover expenses related to doctor visits, health screenings and other medical services. The annual contribution limit for individuals in 2024 is $4,150 and $8,300 for families. Those over age 55 can contribute an additional $1,000 per year.